Bankruptcy Law Questions? Ask a Bankruptcy Lawyer Now.
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Question: If I reaffirmed my 1st mortgage in a chapter 7 bankruptcy and now decided to walk from the home will I be liable for the debt.
Response 1: Unfortunately, yes. Reaffirmation nullfies the benefit of bankruptcy protection for a reaffirmed debt and the debtor continues to be liable for the debt after reaffirmation.
I live in California who has some protection over deficiency debt on 1st mortgage but did I lose that by reaffirming?
Response 2: No, you did not. Your debt would just be treated just like you NEVER filed for bankruptcy protection.
If a non-judicial foreclosure is used, the foreclosing lender cannot come after you for the deficiency after the foreclosure sale. Also, the foreclosing lender cannot come after you for the deficiency after a judicial foreclosure, if your mortgage is a purchase money mortgage in an owner-occupied home with four or fewer units. Non-judicial foreclosure involves using the Power of Sale contained in the deed of trust or mortgage to accomplish the foreclosure sale, whereas the judicial foreclosure involves the use of Courts to accomplish the foreclosure. See California Civil Procedure Code Sections 580d and 580b.
What most often happens is that the lender would forgive the deficiency after the foreclosure sale (if you meet the requirements above) and issue a 1099-C. This is income that must be reported on your tax return using IRS Form 982. However, in light of the Mortgage Forgiveness Debt Relief Act of 2007 that went into effect on December 2007 the forgiven debt amount will not be treated as taxable event/income if the forgiven debt was for a primary home. If part of the forgiven debt doesn't qualify for exclusion from income under this provision such as forgiven debt on a second home or investment property, it may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.
Kindly note that Mortgage Forgiveness Debt Relief Act of 2007 only applies to debts forgiven in 2007 through 2012.
Cool so I can walk away leaving only the house as collateral no strings attached (besides a botched credit report)?
Response 1: That's correct.
Also a side question, would the lender typically report payments if the loan was not reaffirmed? I only ask because they sent me letter saying I wasn't liable for the debt as if I didn't reaffirm it, but they do report payment to the credit bureaus.
Response 2: No. That is one of the reasons the lenders use in luring unsuspecting borrowers to reaffirm the debt. The lender's paper work maybe messed to your benefit.
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